BB Seguridade Participacoes SA

BOVESPA:BBSE3

Earnings Call Transcript 2017-Q4

[Operator]

Good morning, everyone, and thank you for waiting. Welcome to the BB Seguridade's First -- Fourth Quarter of 2017 Earnings Conference Call. This event is being recorded. [Operator Instructions] The presentation is available in the financial information presentation section of BB Seguridade's IR website at www.bbseguridaderi.com.br. Before proceeding, let me mention that forward-looking statements that may be made during the company's conference call regarding expectations, growth estimates, projections and future strategies of BB Seguridade are based on management's current expectations, projections of future events and financial trends that may affect the business of the group and do not guarantee future performance since these projections involve risks and uncertainties that could extrapolate the control of management. For more information on statements of the company, please check on the MD&A. With us today are Mr. Werner Suffert, BB Seguridade's CFO; and Mr. Rafael Sperendio, Head of Investor Relations. Please, Mr. Sperendio, you may now begin.

[Rafael Sperendio, executive]

Good morning, everyone, and thank you for joining our earnings call. So let's start on Page 3 where we have the main highlights of the fourth quarter. Recurring net income averaged BRL 941 million, which is equivalent to a return on equity of 42%. Year-on-year, net income was down 12.5% and dragged by lower financial results in addition here to the decrease that we had in the noninterest operating results which was driven by higher G&A at the insurance companies in SH1 and SH2. I'm going to cover it in more details in the -- on the next pages.

On the flip side, despite the increasing in G&A, we could see in both companies, SH1 and SH2, some improvement in the loss ratio, mainly at SH1, driven by life and credit life. In the pension segment, pension kept doing well, with a net income arising from this segment amounting to a growth of 4.5% year-on-year with a redemption ratio behind 2 percentage points, pretty much close to its lowest historical levels, led the pension assets under management to grow roughly 19% in 12 months.

On the brokerage side, revenues were up 3.7% year-on-year and helped by product sales performance in credit life and in rural. And on the commercial and performance, I'd like to highlight here really strong recovery that we managed to reach in the second half of the year. So when we analyze the main business lines and compare the performance in the second half versus the performance that we delivered in the first half, we can see that when we look on a combined basis, premiums grew roughly 15%; the collections at Brasilcap increasing by 58%; contributions for pension plans grew nearly 15%; and also premiums written in SH1 growing 15%. So a very strong recovery in the second half despite a more volatile environment in the first half of the year.

And finally, on dividends. Our board had approved the distribution of BRL 1.9 billion in dividends, which is equivalent to 90% of the accounting net income in the second half. So considering this amount, in addition to the one that we have distributed regarding the first half of 2017, we paid out nearly 85% of the accounting net income, which is equivalent to a growth of 4.4% as compared to the amount that we have distributed in 2016. So despite the increase of only 0.9% in the accounts and net income, dividends grew at 4.4%.

On Page 4, we have the breakdown of the one-off items. So in the 4Q, the one-off items added up to BRL 33 million. So provide you some color on it. The first one was related to the write-down of the commissions receivables at the broker. So we -- during the process of deploying the ERP system within BB Seguridade, BB Seguros and BB Corretora, we realized that we have to write up BRL 15 million -- actually, BRL 26 million in gross brokerage commissions receivable.

And the other effect was BRL 17 million post taxes regarding the revision of the insurance operations database at SH2 in order to comply with SUSEP, the insurance regulator in Brazil, the rules of the SUSEP. So both adjustments were nonrecurring and we don't expect it to happen again going forward. So the accounting net income in the 4Q was BRL 908 million, down 7.5%. Adjusted by nonrecurring events, the recurring net income was down 12.5%.

For the full year, added to these 2 effects that I mentioned, we also had the disposal of part of our investment at IRB, which amounted to BRL 171 million post taxes. And when we look at the accounting net income for the full year, it was up 0.9%; adjusted by nonrecurring events, down 4.8%. We have return on equity of nearly 46% on a recurring basis.

On Page 5, we have the biggest challenge that we had in 2017 financial results. So financial results declined by 12% in 2017 and accounted for 28% of the net income, down from 31% in 2016. So the most straightforward impact to that comes from the reduction in Selic rate, as you can see on the upper left-hand side, down from 14% to 10% the average rate for the year, 7.25% year-end.

Inflation was also down in both indexes, IPCA and IGP-M, which impacted the return on increase on protected securities [indiscernible] held to maturity. And on the positive side, we had some movements that helped somewhat to offset these negative impacts of the lower Selic and lower inflation of our financial results. So regarding the lower inflation, the lower IGP-M helped the financial expenses at Brasilcap, so they were lower on the finance benefit plans.

And on your upper right-hand side, we have the downward move of the forward yield curve in 2017, which provided some gains on mark-to-market of 0 coupon bonds. So these factors helped but were not enough to fully offset the decline in the Selic rate, and that's why financial results were down 12% on a yearly basis.

On Page 6, I'm going to start to cover the performance per business segment. So starting with SH1, life and rural. Premiums written were up 13% year-on-year in the fourth quarter. In 2017, premiums grew 4.1%. And in both comparisons, the premium growth was driven by rural, credit life and, the lesser extent, mortgage life. So credit life showed some very impressive performance in the second half. So just to remind you, year-to-date June credit life was down roughly 30%. So in the second half, credit life grew nearly 60% year-over-year and ended 2017 growing 12% on lower cancellations and also improving origination, mainly in individual segments, the individual portfolio grew 28% year-on-year in 2017.

Moving to the operational performance on Page 7. The loss ratio showed a very strong trend throughout 2017 despite the uptick in the third quarter and ended the year down 2.6 percentage points. But despite this improvement in the loss ratio, we have observed some deterioration in the combined ratio, mainly in the third and fourth quarters, which was driven by the other 2 reliable years. So the increase in commission ratio, which was a result of the adjustment that we have made on commissions of some life insurance products sold in the Bancassurance channel, there's a commercial incentive for the second half. But actually, this is very good for BB Seguridade. Despite increasing the expenses at the insurance company, it provides more commissions to the broker. So on a combined basis, this is a positive effect for BB Seguridade.

And the second variable here, we can see the increase in the G&A ratio, mainly in the 4Q due to the impairment of nearly BRL 30 million regarding recoverable reinsured claims. This was the result of the process of revising the database of reinsured operations, which started in the first part of 2017. And the second effect that we had which led to an increase in the G&A ratio was related to higher tax expenses, which were unusually lower in the fourth quarter 2016, mainly due to the change in the accounting methodology, which resulted here in the creation of deferred tax assets related to temporary differences of PIS and COFINS tax rates.

On Page #8, we can see that despite the increase in commissions, the underwriting results manages to grow 1% year-over-year in the 4Q and declined only 1% in 2017. And this is thanks to the lower loss ratio. Financial results were up 44% year-on-year in the 4Q and driven by capital gains on the disposal of some securities that was being -- have been shared at book value. I think the balance sheets of some insurance companies using SH1. On a yearly basis, financial results here were down 8% and mainly affected by the reduction in the Selic rate.

And as an outcome of what we have discussed here in these 3 pages, net income was down 15% year-on-year in the 4Q and 10% on a yearly basis with a return on equity of 42% in 2017.

On P&C, Page 9, premiums written were down 4.2% year-on-year, 2.2% in the yearly comparison here and dragged down by auto insurance and DPVAT, which is a mandatory insurance in Brazil. The government reduced the price of this mandatory insurance because of lower claims and this had a direct impact on premiums.

2017 was still a very tough year for auto and P&C overall, but it's worth mentioning that according to the announcement that we made earlier as well, we are working together with Mapfre in order to redesign the business that we have together and we are pretty much sure that we will find the best solution for both partners.

On Page 10, we have the operating performance of the P&C business. So on the upper left-hand side, we have the loss ratio, which actually improved in both comparables in the 4Q year-on-year and for the full year 2017, driven mainly by lower claims in casualties. The commission ratio was up, and mainly on the higher commissions paid to independent brokers for auto insurance, so differently from SH1. This is not a growth trend, but because this commission flows to independent brokers.

G&A also increased 1.1 percentage points year-on-year and 2.1 percentage points in 2017, basically because of the same reasons that we talked about in SH1 related to the change in the accounting methodology or tax expenses. And in addition to that, we also have some higher payment -- impairments related to receivables and the unrecoverable claims. And that is the outcome of these dynamics of lower loss ratio, but on the other hand, higher G&A and commissions. The combined ratio deteriorated by 1.7 percentage points year-on-year in the 4Q and 1.8 percentage points in 2017.

On the next page, we can see that the lower loss ratio was not enough to offset the increase in commissions. So the underwriting results was down 8% year-on-year in the 4Q and down 6% in the yearly comparison. The net investment income financial results, as expected, were down 20% year-on-year and 36% in 2017. This is totally explained by the lower Selic rate. So when we add the increase in the G&A ratio to this analysis, we can see that all these effects combined led SH2 to a net loss of BRL 59 million in the 4Q and a net income of BRL 16 million in 2017.

On Page [ 10 ] here, Page 12, gross deposits had dropped 26% year-on-year, and it's worth reminding that the 4Q, which had the all-time high in terms of gross deposits, was a very hard comparable. Even though we posted a decline year-on-year, we managed to sustain the market share, which was above 1/3 of the market in gross deposits, which was like the ones that we have been able to capture throughout 2017.

So the redemption ratio here kept declining throughout the year and that the 4Q, 2 percentage points down year-on-year. And when we look on a yearly basis, the [ credential ] ratio was down 0.9 percentage points and helped reserves to grow 19% over [indiscernible] between BRL 235 billion. Revenues with management fees increased 16% year-on-year in the 4Q and a 22% in 2017. And when we add to this increasing revenue with management fees, the improvement that we saw in the cost to income ratio, these were the main drivers for the 5% growth year-on-year of the net income in the 4Q. And also, they were the main drivers for the 8% growth in net income on a yearly basis, reaching 43.1% of return on equity, which was 1.3 percentage points higher than the one that we reported in 2016.

On premium bonds, Page 13, collections kept improving on a quarter-on-quarter basis, growing 23% Q-o-Q and are falling 1% year-on-year. On a yearly basis, collections were down 13%. On the flip side, financial results continued to fall and dragged by the lower Selic rates. So the net interest margin was compressed by 270 bps year-on-year and 110 bps in 2017. So given these weaker financial results and the decline in collections, the net income was down 65% year-on-year and at 42% in 2017. But anyway, the business is still accretive with a return on equity of 62% in 2017, 39% in the 4Q using a very good return despite the low interest rate environment.

At the broker, on Page 14, brokerage income adjusted for one-off events rose 3.7% year-on-year helped by the increase in commission charges on some life insurance products as well as on the new premium bond portfolio, along with a very strong performance in sales of credit life and rural insurance. In 2017, brokerage revenues grew 0.4% and helped by life, which was driven by increase in commissions, [indiscernible] because of increasing claims of insurance premiums which more than offset the decline in the other business lines, in pension and premium. But such improvement, along with the other EBITDA margin, was not enough to offset the weaker financial results, so net income was down 2% year-on-year and 1% in 2017 and same effect here explains the reduction in net margin.

On Page 15, we have the accountability regarding the 2017 guidance, so net income change was within the estimates and the interval was minus 5 to minus 1. We have delivered minus 4.8% in 2017 on a recurring basis.

And finally, on Page 16, we have our guidance for 2018. So our expectation is that the change in the recovery net income will be between minus 2 to plus 2 range. Although the 2018 is already showing some economic recoveries, it's still a difficult year from the point of view of the financial results. So 2017 ended with an average Selic rate of 10% and the estimates of the focused report at the Brazilian Central Bank points to an average Selic rate of 6.75% for 2018. So interest rates might decline by 33% in relative terms, which is even more than the reduction that we saw in 2017. So financial results will continue to be a strong headwind that we will need to deal with again in 2018. And our intention is to deliver an increasing operational results that can offset full year in part the decline in financial results.

So that's all I'd like to emphasize and we may now move to the Q&A session.

[Operator]

[Operator Instructions] Our first question comes from Thiago Batista with BBA -- with Itau BBA.

[Thiago Bovolenta Batista, analyst]

Yes. I have a follow-up from the Portuguese conference call. When I asked about the implied financial results in the guidance, you mentioned a decline pretty much in line with the Selic rate. That means something close to 30% in '18. Do you have the earnings of around -- [indiscernible] earnings? We're mainly saying that the operating results will expand low double digits, in my calculation, 13%, the operating results. These numbers are feasible, this level of growth for the operating -- I know that you don't have guidance, et cetera, but this level of expansion of the operating results is feasible in '18?

[Rafael Sperendio, executive]

Thiago, Rafael speaking. So your estimate is pretty much in line with ours, so it's totally feasible.

[Thiago Bovolenta Batista, analyst]

And do you have any idea which lines will lead to the expansion?

[Rafael Sperendio, executive]

Mainly an improvement in the commercial performance of some business lines. It's worth mentioning that with the very strong increase that we saw in credit life in the second half, we will start to accrue results in 2018 besides the sale that will be made also throughout the year. But we will start to get a benefit of the strong Selic performance in credit life that we have in the second half 2017 and also some improvements on the expense side. So we have a very strict, I would say, cost control when we were designing the budget for all the affiliate companies for 2018. So we will be looking at these expenses very carefully throughout the year, and we believe that is going to bring some improvements for the non-interest operating results. So these are the 2 most important pieces -- segments that we believe will show some improvement in the operating side of the business.

[Operator]

Our next question comes from Lucas Lopes with Credit Suisse.

[Lucas Lopes, analyst]

It's a very simple one. I mean, you have announced the higher payout ratio for the second half of 2017. Can we show as well the rationale of the increase in the payout, and whether or not this is sustainable for this year as well? Or even this should be the new target of management for the medium to long term?

[Rafael Sperendio, executive]

Lucas, it's Rafael. So regarding the rationale behind increasing the payout ratio, it's worth mentioning that our intention is to maximize the distribution of dividends to shareholders. So if we don't find that we have good reinvestment opportunity and return that we think that makes sense, we will distribute it to shareholders. So we also analyze that we are in a difficult economic environment. Of course, with better prospects from 2019 on that we are still in that transition phase. And we found interesting the option of increasing the payout ratio in order to offset temporary lower pace of growth in net income. So currently, the accounting net income growing 0.9%, as I mentioned in the presentation. We managed to increase the dividend by 4.4% and we had the same strategy in 2016 when we increased the payout ratio from 80 to 82. Now we are increasing from 82 to 85, and this is going to be our intention from now on, maximize as much as we can the distribution of dividends to shareholders, unless we have a good investment opportunity. But this is not the case right now.

[Operator]

[Operator Instructions] This concludes today's question-and-answer session. I'd like to invite Mr. Rafael Sperendio to proceed with his closing statements. Please, Mr. Sperendio, go ahead.

[Rafael Sperendio, executive]

Well, I would like to thank you all once more for listening to our earnings call and to emphasize that the management team is very committed to generating very strong operating results despite a still tough year in terms of financial results. We believe that we will be able to give a very strong operating revenue stream in 2018, as we did in the second half of 2017, and to get the benefits of this improving commercial performance [indiscernible] improvement in the operating performance and get all these benefits in 2019 when we won't have this headwind coming from the financial results anymore and get closer to the potential growth rate that we believe that the company is able to achieve. And in the meantime, we will keep working on alternatives to maximize the return on equity and to increase the -- and to improve the capital allocation among the main business lines that we have. So thank you all, and have a good day.

[Operator]

With this, we conclude today's BB Seguridade's conference call for today. As a reminder, the materials used in this conference call is available on BB Seguridade's Investor Relations website. Thank you very much for your participation. Have a nice day. You may now disconnect.